Clearer path ahead for social impact investing?

Rebecca Claydon looks at how the regulatory future for impact investing is looking brighter

· Our thoughts,Impact Finance,Social Investment

If you have an interest in impact investing, it won’t have escaped your attention that the market continues to attract champions and allies, as well as a few critics. Over recent months, we’ve noticed something of a focused shift in the regulatory direction of travel and we think it heralds a smoother path ahead for this developing market.

Since spring we’ve been seeing real appetite from Government and regulators alike to smooth the regulatory path. Just in case you’d missed the action, we have set out some of the key developments.

Considering ESG and non-financial objectives

There is broad consensus for a need to better recognise the significance of social, environmental, governance and other related risks and opportunities alongside financial goals.

On an international level, the EC has set a clear direction for requiring consideration of ESG issues as part of an investor’s fiduciary duty as an action area within the European Commission’s Sustainable Finance Action Plan.

The Green Finance Taskforce’s report, ‘Accelerating Green Finance’, also supported the recommendations to improve the capacity and performance of the investment sector on ESG issues, including climate change, noting the barriers to investor competence on ESG and supporting the revision of investment regulations.

The FCA in its Asset Management Market Study have acknowledged the financial materiality of investors non-financial aims, including ESG risks, and consulted on regulatory changes to ensure that non-financial objectives should be incorporated into investment advice and decision making.

Also on our radar is an ongoing competition investigation into the investment consultants market, with detailed findings and remedies yet to be announced. The CMA’s provisional findings however indicate that there may be some mention of ESG and non-financial outcomes

A focus on pensions

As well as work relating to the growth of sustainable and ‘Green’ finance, we’ve seen a number of developments focusing in particular on pensions, recognising the enormous potential long-term asset pool that pensions could offer to grow the social investment market as well as to help crack the enduring problem of pensions engagement, perhaps better connecting savers with their long term investment choices.

Responding to recommendations of the Law Commission report on pension funds and social investment and the Advisory Group’s recommendations, the government said it was considering changes to regulation that would make it easier for pension funds to invest with an environmental and social impact.

It said it was also considering further actions “to help build capacity and increase transparency around social impact investment by pension schemes”, and the DWP have recently taken forward a consultation on clarifying pension fund trustees investment duties.

We’ve also seen various updates from the FCA regarding pension regulation. The FCA intends to consult on a package of rule changes for Independent Governance Committees in the first quarter of 2019, requiring IGCs to report on their firm’s policies on:

We also expect a future FCA consultation on workplace personal pension DC schemes on considering financial factors (such as ESG risks and climate change) and non-financial factors (such as responding to members’ ethical concerns) when making investment decisions.

Permitted links and illiquid investments

One of the perceived barriers to investment that was noted was around the illiquid nature of social impact investment. The FCA is also involved in the Treasury’s Patient Capital Pensions Investment Taskforce, and aims to tackle barriers to investment in more illiquid assets.

The Pensions Regulator have said they are going to provide further guidance on how trustees’ investment strategies can include these types of assets in a diverse portfolio

A sense of growing collaboration

Across the many different initiatives underway, there seems to be a much improved sense of collaboration and dialogue, recognising the need for different stakeholders to work together to maintain momentum.

Various government departments including the Treasury, DCMS, BEIS and the DWP have established a formal dialogue with the Financial Conduct Authority (FCA), The Pensions Regulator (TPR) and the Financial Ombudsman Service (FOS).

The Regulators’ engagement is particularly noted and welcome by the Government. The FCA recently established an internal working group to discuss green and sustainable finance, and also held a workshop in May 2018 that was attended by leading institutions.

There’s clearly still an enormous mountain to climb, but with current momentum and good intentions from across the industry and beyond to take concrete action, things seem to be heading in the right direction.

We'll be keeping an eye on all of the developments as they progress and supporting the Implementation Taskforce regulatory agenda If you're particularly interested in this area, sign up for our Impact Newsletter or join our Impact roundtables series by contacting r.claydon@bwbllp.comr.claydon@bwbllp.com.